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Technical verses fundamental analysis

Nick Goold

There are two types of analysis used in trading: technical analysis and fundamental analysis. Which do you prefer to use?

When you first start trading, you tend to be biased towards technical analysis only, but actually, fundamental analysis is also an essential part of trading and helps you to maintain an outlook for the market.

What is technical analysis?

Technical analysis is the process of analysing past markets and predicting the future by finding recurring patterns. The main tool used for this technical analysis is an indicator. Indicators are displayed on a chart, and traders look for trade signs based on various conditions of the indicator. Some of the world's most popular indicators include moving averages, Bollinger bands, MACD and RSI. Another popular analysis method that does not use indicators is price action. This is a technical analysis based on the momentum of price movement. Depending on how the price moves, we look at the tendency for the next price movement to be similar.

What is fundamental analysis?

This is an analysis of future economic trends based on news and market information. It looks for and analyses the factors that may cause the market to rise or fall. For example, comparisons of the economic and interest rate outlooks of different countries, supply and demand problems for particular commodities, or the profit outlook for a particular group of companies are also used as sources of analysis. The news content may result in temporary market turbulence, or it may create a new trend. It is normal for a change in trend to increase volatility. In particular, major trends are often created during US presidential elections.

Both technical and fundamental analysis can be used in all trading methods, but comparatively, technical analysis tends to work better for short-term trades, such as scalping and fundamental analysis for long-term trades, such as swing trading.

While some traders use only one of the two types of analysis, professional traders use both. If you rely only on technical analysis, you run the risk of not being able to react to sudden news or economic indicator announcements or of suffering heavy losses because you have not prepared for the unexpected. Conversely, if you rely solely on fundamental analysis, you will often fail to ride the trend or miss trade opportunities, as many traders trade based on the signs represented by indicators.

It is important for any trader to use both technical and fundamental analysis in common to understand the market situation. Scalping cannot be solely based on technical analysis, and it is essential to check the news before trading. If there are economic indicators to be released, it is wise to avoid trading at that time.

Market analysis should be done before opening a position and before setting a strategy. Trade using a suitable strategy in line with your market analysis.